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Legal Tip 77: Joint Purchasers of Land and deeds of partition

Discussion in 'Legal Issues' started by Terry_w, 15th Sep, 2015.

  1. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    What is a deed of partition?

    When 2 or more persons purchase land together and have the intention of developing that land then they may wish to consider entering a deed of partition.Persons here includes companies so the following can apply to companies and trustees owning land.

    Say A and B own land jointly and wish to construct 2 properties before sub-dividing the land into 2 separate titles and then end up with 1 title each – person A will own lot 1 and person B will own lot 2. This is a transfer of title. Names will change from 2 names to 1 name on each block. Transfer of title will result in a dutiable event with stamp duty payable by person A on 50% of the value of lot 1 and by person B on 50% of the value of lot 2. CGT or income tax would also be payable by A and B on the profit of the bloke that they transferred. Because the properties build are new there may also be GST payable by the transferor.



    Wouldnt it be good if each of A and B could own their own blocks separately from the beginning? Well they can potentially. A deed of partition can be entered into by both A and B. The deed will document a trust like relationship to allow person A to own part of the land for person B and vice versa. So even though both names are on both ‘parts’ of the land the beneficial owner of each part is either A or B.





    Later when the land is sub-divided person A will end up with the part of the land that was legally and/or beneficially owned for A and same with B.

    Each state provides for stamp duty concessions for such transfers of title. In NSW see s 30 Duties Act

    1997 (NSW) where the duty is just $50.



    For a technical paper on partitioning see

    Denis Barlin

    Partitioning Land – How do you ensure there are no unexpected tax liabilities?

    http://www.13wentworthselbornechamb...ploads/2015/01/partitioninglandaugust2010.pdf
     
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  2. Blacky

    Blacky Well-Known Member

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    @Terry_w does this only apply to land? or can it also apply to a unit development.

    eg - A & B jointly purchase a block of land and build 4units.
    On project completion A gets 2units and B gets 2units.
    A sells both, B keeps both.

    Does GST/CGT/Profit apply to only A.
    B will incure the applicable taxes when/if sold in the future?

    Thanks
     
  3. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    Blacky, if there is a trust relationship (bare trust) from the beginning there would be no CGT - only legal ownership would change on transfer of titles, but the beneficial ownership would remain the same. s106-50 ITAA97

    It can apply to strata titling too.

    GST aspects are rather complex.
     
  4. Blacky

    Blacky Well-Known Member

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    Very interesting - thanks for the info.

    Maybe a game changer for me and many others.

    Getting the structure right up front and early has many advantages and can save tens (hundreds?) of thousands!

    Blacky
     
  5. Perthguy

    Perthguy Well-Known Member

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    I agree this has a lot of potential. I only have limited understanding but I think the structure has to be set up the right way even before you sign the offer and acceptance (in WA) or contract in other states? @Terry_w will be able to confirm. All of this just reinforces to me that we need to get our advice up front, even before we sign an offer.
     
  6. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    Yes best to set up before signing contracts as thete will be both tax and duties consequences.
     
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  7. Perthguy

    Perthguy Well-Known Member

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    Thanks Terry. You are awesome! Legal Tip 77. Amazing. :)
     
  8. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    I thought this was well known about. I have mentioned deeds of partition many times.

    I should do one on bare trusts
     
  9. Perthguy

    Perthguy Well-Known Member

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    Interesting. GST would not be more than stamp duty would it? The main considerations I see are:
    CGT, Stamp Duty, GST.

    So if I bought a house with developable land with my investment partner (50/50) to build three townhouses, sell one and at the end I own one and he owns one... that is really complicated! Let's call them T1, T2 and T3. If we bought in our own names as tenants in common sold T2 and then I sold my half of T2 to him and he sold his half of T3 to me. T1 is sold, he owns T2 and I own T3.
    Sale of T1 would be subject to GST and would be a CGT event for me and for him.
    Sale of 50% of T2 would be subject to GST, stamp duty and would be a CGT event for me.
    Sale of 50% of T3 would be subject to GST, stamp duty and would be a CGT event for him.

    If we bought in a bare trust with a deed of partition in place prior to the purchase of the property. We still sell T1, so GST and CGT still apply as per the previous example. However the other 2 transations are not the same as above. My understanding is the partitioning will not trigger a CGT event but GST will apply. Stamp duty depends on which State this occurs but could be less than option 1.
     
  10. Perthguy

    Perthguy Well-Known Member

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    I meant it is amazing you have already posted 77 legal tips. The tips are a fantastic resource.
     
  11. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    For GST it would depend on whether it is supply in the course or furtherance of an enterprise.
     
  12. Perthguy

    Perthguy Well-Known Member

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    Thanks Terry.
     
  13. Peter P

    Peter P Well-Known Member

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    Q. Example scenario: 1 title, 2 houses, owned jointly by A and B, land value exceeds NSW land tax threshold. After partition document, A now owns lot 1 solely and B owns lot 2 solely. Is this correct? If so, would they now have their own individual tax thresholds and potential escaped land tax?
     
  14. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    Yes, each would own their respective property solely so for land tax and all other purposes would be assessed separately
     
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  15. Link93

    Link93 Member

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    Hi Terry and everyone, thanks for this tip it is helpful.

    if I could ask a few very newbie questions:

    My sister and I have been offered some family help to buy a house on a large block of land that we could potentially subdivide down the track (make into two houses, each either PPOR or IP). Until then the house itself will be an IP.

    I realise the difficulties with joint ownership, eg with regards to our future serviceability calculations.

    1) I was wondering if partitioning early would help us avoid this difficulty? So we could get one loan each for our portion without being on a joint loan.

    2) would it be silly to partition a piece of land with a house on it seeing as it may be 8-10 years before we develop it? Ie would we end up with something silly like owning half the house each?

    3) could we partition the land but not the house on it? If possible how would the loan and mortgage be structured? How about the rental income?
     
  16. GoOnAndTell

    GoOnAndTell Well-Known Member

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    Hi Terry, is this something I would speak to my accountant or solicitor about? And if i am reading correctly if can't go back and solve it, once the property is in joint names with out this deed in place it is too late.

    And would it be possible to enter into it with out knowing the exact outcome, e.g. if you don't know if it will end up with 3 or 4 units in a development for example.
     
  17. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    This is legal advice generally. You need to speak to a solicitor.
    You can ask the accountant about the CGT and GST issues.

    It is not too late if you own property but could result in CGT and stamp duty in part.
     
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  18. GoOnAndTell

    GoOnAndTell Well-Known Member

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    Thanks i will add it as notes to discuss when speaking to both next. Trusts and structures are a bit of a pain, sometimes it is hard to know who side to speak to first as both sides have different objectives.
     
  19. Terry_w

    Terry_w Tax and Structuring Lawyer Business Member

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    Trusts are legal relationships so anything other than income tax speak to a lawyer - including stamp duty and land tax.

    Anything related to commonwealth tax talk to a lawyer or an accountant.
     
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